One of the biggest challenges facing the team drafting the National Broadband Plan was figuring out how to adapt existing regulatory models to the realities of today’s competitive broadband marketplace.  Two specific areas where the plan’s recommendations thread that needle are pole attachment rates and high-cost universal service reform; and it does so by recommending steps that begin to reduce artificial distortions produced by government subsidies and the cost of important inputs to deploying and operating expensive networks.

Pole Attachments

OK, I recognize pole attachments are not the usual glamorous telecom issue.  But as an input into deploying and operating broadband networks, it is critical: today costing broadband providers hundreds of millions of dollars each year.

Congress first recognized the importance of reasonably priced pole attachments back in 1978, when it established the cost-based rate formula for cable pole attachments.  Utilities have resisted these rules ever since, but the Commission and the courts have consistently reaffirmed them.  In the 1996 Act, Congress adjusted rates for competitive phone carriers but the rate formula it adopted is still much higher than the rates produced by the cable formula.

Today, there is broad agreement that having different rate formulas is ineffective and moving to a uniform rate for all broadband providers is better policy.  But the level of that uniform rate continues to be a point of dispute.  When the Commission sought comment on this issue in 2007, NCTA suggested that low attachment rates for everyone would better promote broadband investment:

The best way for the Commission to make progress on all of its goals – broadband investment, facilities-based competition, and regulatory parity – is to reduce the rate for attachments by telecommunications carriers. Just as taxing cable broadband customers by raising the attachment rates paid by cable operators could have significant negative effects on investment and competition, reducing the rate for telecommunications attachments could have significant positive effects.

We are pleased that the Plan reached the same conclusion (page 110):

To support the goal of broadband deployment, rates for pole attachments should be as low and as close to uniform as possible.  The rate formula for cable providers articulated in Section 224(d) has been in place for 31 years and is “just and reasonable” and fully compensatory for utilities.  Through a rulemaking, the FCC should revisit its application of the telecommunications carrier rate formula to yield rates as close as possible to the cable rate in a way that is consistent with the Act.

We applaud the Plan’s recognition of the benefits that can be realized by using the cable rate formula as the basis for a uniform broadband attachment regime.  We look forward to working with the Commission to make this vision a reality.

High-Cost Universal Service Reform

Another byproduct of the 1996 Act is a Congressional directive that the FCC create an explicit universal service support program to ensure that consumers in high-cost areas would be able to receive landline telephone service at reasonable prices.  As a result, the Commission established a number of different funding mechanisms, each with its own set of complex rules.

But as technology has developed and competition increased, the Commission has made remarkably few changes to these high-cost support mechanisms.  As a result, the overall size of the high-cost support program has increased substantially, as does the contribution burden imposed on American consumers.  In 2000, the contribution factor was under 6 percent of interstate telecommunications revenues; when it reached 10 percent, in 2005, there was general agreement that the program was on an unsustainable path; but for the second quarter of 2010, the factor will exceed 15 percent.  This is a disturbing and expensive trend.

Late last year, NCTA submitted a petition proposing modest steps to put the high-cost program on a more sustainable path.  We identified two keys:

1. reducing or eliminating support in rural areas where cable operators and other facilities-based providers are offering service without any subsidy; and
2. calculating the subsidy in noncompetitive areas at the minimum level necessary to attract private investment, recognizing the significant revenue opportunities that broadband networks offer as compared to voice-only networks.

These sorts of changes could free up funding for the Commission to support the deployment of broadband networks in unserved areas without increasing the contribution burden on American consumers.

The Broadband team has incorporated these principles into its proposed USF reform strategy.  The Plan recommends creation of a new Connect America Fund (CAF) that would support broadband deployment in areas that have not attracted private investment.  CAF would use market-based mechanisms to attract initial investment (but no more) and funding would come from reducing, and eventually eliminating, the broken high-cost support mechanisms.  This would enable the Commission to achieve the goal of universal broadband availability without significant increases in the size of the USF program.

Implementation of these recommendations will be a complex, long-term project for the FCC.  The Plan proposes a 10-year plan for achieving its objectives, but notes that “no one can accurately foresee every potential market dynamic between now and 2020 . . .  The precise timing to achieve universal availability will depend on multiple variables, many of which are beyond the control of regulators.”

That is true, of course, but the Plan goes on to explain that “the fact that the FCC may need to make mid-course corrections along the way does not change the overarching national policy imperative ─ the need for a connected, high-performance America. For the nation to achieve this goal, the steps outlined in this plan must be taken promptly.”

We couldn’t agree more.  We stand ready to work with the Commission on these critically important issues.

There is little doubt that all 356-pages of the National Broadband Plan will be analyzed thoroughly in the days and weeks ahead.  I’ll take this opportunity to offer some commentary on the “Broadband Competition and Innovation Policy” chapter which among other items addresses how the Commission can create a true retail video device marketplace that works for consumers that subscribe to any multichannel video programming distributor (MVPD).

First, and perhaps most importantly, we are very pleased that the Plan is so clear that the only way a retail video device marketplace can fully work for consumers is if all MVPDs participate.  And, as part of a proceeding to do this, we have already committed to a series of consumer principles governing video devices which we think can and should serve as the foundation for Commission and inter-industry efforts:

Our industry is committed to providing content to consumers where and when they want it, on all possible consumer devices, and for those devices to be innovative platforms for new applications. We want consumers to be able to buy video devices at retail and to know that cable content can be among their video sources.

The cable industry has consistently asked the Commission to take a fresh look at the CableCARD and navigation device rules in light of today’s market where 40 million consumers subscribe to video service from satellite and telephone providers.  Most of cable’s competitors have been exempted from the rules which clearly haven’t led us to the place that Congress envisioned in the 1996 Telecommunications Act.

As far back as August 2007, NCTA called on the Commission to implement an “all MVPD” solution:

For CE manufacturers who would build devices that can operate not just across cable but across a wide variety of MVPD networks, there could be a new network interface device. Such a device could handle most of the complexities of network consumer premises equipment functionalities and deliver an MVPDs services across an interface that can also be used by other MVPD networks. This approach could offer consumers a low cost option for accessing all cable services on bi-directional retail devices, the ability to use their televisions with other MVPD providers, and the capability to access new services on the same television as new and innovative services are deployed. The cable industry could work on such a solution should the Commission bring those networks into meaningful regulation.

We renewed our call for a broad Commission proceeding last December and highlighted some of the reasons why a cable-only retail video device marketplace has failed to develop:

It may be that consumers simply prefer the option of leasing devices that are available at government regulated “cost-plus” rates (or whose rates are otherwise kept low in markets where effective competition exists) and which can be upgraded when the next model is released rather than purchasing a device at retail and assuming the risk of obsolescence.  Leasing also makes it easier for customers to switch from cable to satellite to telco video services and back again, especially since today’s retail CableCARD devices are not supported by the DBS providers or many telephone-company MVPDs. It may be that the CableCARD, while well supported, is becoming outdated: AT&T’s U-verse and other IPTV services use DRM-based security methods.

The Plan also suggests replacing the CableCARD regime in favor of  a “gateway” approach.  As we’ve pointed out before, a gateway approach is certainly one of several approaches that should be thought through, and we are pleased that the Broadband Plan acknowledges that “functional equivalents” should also be reviewed.  But, while we are committed to working constructively with the FCC on this and related issues, we still firmly believe that technology mandates should be a last resort.  And to meet different consumer demands and needs, it is important that innovation be encouraged by both MVPDs and third party manufacturers.  Proposals to “disaggregate” a service purchased by a customer, and provided by a MVPD, over-the-top or other service, would undercut the very premise of innovation we should want, and are likely to fail.

We also welcome an informed debate on the Plan’s proposed short-term fixes. However, the focus on cable-only changes is, to be candid, at odds with the effort to incentivize all-MVPD solutions, and its proposals to change the CableCARD regime seem inconsistent with the Plan’s overarching recognition (which we pointed out last year) that cable-centric CableCARDs do not appear to be the key path to success.  We’ll make the case to the FCC that it is far better to focus on improving the marketplace for consumers in light of the exciting changes taking place before our eyes than to dwell on issues that are increasingly stale and, more important, increasingly irrelevant to the marketplace of today, let alone tomorrow.

One of the highlights of the SXSWi conference in Austin was the session “Pay TV vs. Internet – The Battle For Your TV,” featuring a no-holds-barred debate between Mark Cuban, Chairman and President of the programming service HDNet, and Avner Ronen, CEO & co-founder of Boxee. The two have sparred before on the topic whether “the Internet” is going to replace today’s existing television models and this clash was just as lively, punctuated early on by a fire alarm that emptied the room for a time.

Staci Kramer at PaidContent neatly sums up their positions:

…Cuban believes in subscription TV and sees Ronen… as representing free-only; Ronen believes TV over the internet is the present—and the future but a la carte. He’s not anti-pay per se—Boxee is working on a pay offering—but anti-establishment TV. Cuban doesn’t see an internet TV business model that works yet.

“How will content be paid for?” is a key question, and the Current Events blog notes that Cuban made strong points in this area:

Cuban pushed hard, arguing that other than a few big players, like Apple, you simply can’t get people to pay on a scale to make a solid business case for internet delivery of media. Ronen fired back with the question “What you are saying is that because you have lack of choice, you are going to win?” Cuban kept going back to the fact that Boxee can’t monetize their business, while Cuban won’t broadcast anything he can’t make a dollar on, and he has a point. Everyone wants to be able to pick and choose what they want to watch, but with the internet giving so much of it away for free, few are willing to pay.

At several points, Cuban argued that the Internet isn’t really set up for efficient delivery of video, but that cable’s infrastructure is. The Gearlog blog highlighted this point:

“But people are willing to pay for Internet video right now,” Ronan responded.  “They are paying for Netflix, they are paying for MLB, they are paying for a lot of things,” he said. “It isn’t about free or not free. It is about whether the Internet can deliver video and it can.”

How much video and how reliably it can be delivered is a different question. And that is where Cuban made his strongest points.  Having a few million users download programming a few times a week is one thing, but what about when it is tens of millions? The Internet simply wasn’t built to support that kind of delivery.

Ronen kept arguing that the old models are dying, that distribution via the Internet is the future, and that it is therefore foolish for content owners for Cuban to not make content available online. Cuban countered that no one is making significant money online and made it clear that he wasn’t going to give his content away for free. For example, Cuban joked, perhaps the producers of the show The Office should just give their program away for free and then tour the production as a play around the country.

Two colorful Cuban quotes:

• “The a la carte model is for morons.”
• “If you think that the Internet going to replace cable, you’re crazy.”

His larger point is that in an a la carte universe, content players have to include significant promotional expenses, because in a world of unlimited choices, you have to find a way to stand out. To an audience member who complained about “paying $100 a month to watch three shows,” Cuban responded, “In an a la carte world, you’re one of zillions. Marketing is expensive.”

But I think the key point of the whole discussion slipped by most of the audience, and I haven’t seen it reflected in the news coverage. An audience member asked how an Internet-based subscription service – one where the consumer contracts with a company, that then delivers video over the Internet for a fee – would differ from what we have now. Cuban said this was a good question. It is, because the answer is that it wouldn’t look different at all.

I went up afterwards to discuss this with Cuban and confirmed what I was thinking. Consumers don’t care how programming comes to their house, whether it’s over fiber or coax, by satellite or by IP transport. They turn on their TV and watch stuff. So, as long as the economics of producing content remain the same, and there’s no reason to think they won’t, then the technical means of getting programming into the home are immaterial.

Cuban said to an audience member after the session that many of the elements of Internet-based  content look just like digital cable: streaming content on demand, storage costs, capacity issues. As cable becomes increasingly digital, those similarities increase. And if those two worlds – Pay TV and the Internet – are alike in many ways, then it becomes even more important to look at the ways they are different.

Cuban thinks that cable’s subscription model works better for him financially. He also thinks that cable does a better job of delivering video, especially as hi-def becomes more prevalent.  Consumers aren’t going to care about the nuts-and-bolts of how it all works. As Cuban put it, “The future of television is… television.”

[NOTE: Photo above used by kind permission of Staci Kramer.]

With lots of activity happening in the media and entertainment sectors in 2010, we’ve recently seen several stories about the carriage of programming services by cable and other video providers. This coverage has been partly driven by negotiations between programmers and operators about carriage fees, partly by retransmission consent disputes, partly by the growing prevalence of online video.

Many of the news stories and blog coverage have attacked the business model of multichannel video providers (which includes cable, DirecTV & DISH, AT&T’s U-verse & Verizon’s FiOS). Such arguments invariably lead reporters and bloggers to one of two conclusions: We need à la carte or all video should be available online to all consumers.

Over at AllThingsD, Peter Kafka revealed a rate card from an unknown cable operator that reveals what said operator pays each programmer for the right to carry their signals. Kafka thinks that the hidden cost of programming is the problem.

As I’ve said before, I think that many cable viewers are probably okay with most of the bundle–or at least unwilling to foot the bill for real a la carte pricing. But maybe if you waved this list in front of them, they might rethink that.

Of course, there are a few problems with this. First, there’s no way of knowing what these prices really mean. Could this be the same rate that all companies pay? After all, Wal-Mart doesn’t pay the same price for product as another retailer might. In addition, the “wholesale” price that a video distributor pays (or any business for that matter) isn’t the same price that a consumer pays, especially if you purchased channels on an individual basis versus the savings of a bundle.

At the Atlantic, Derek Thompson points out more problems:

Monthly cable bills are about $50, [Kafka] says. An American’s average monthly TV time is 150 hours (via Nielsen). So today we pay about 30 cents per hour of TV, right? Not exactly. Monthly cable bills are by household. Monthly TV hours are by individual. I live with two roommates. I pay $17 for cable and consume 150 hours of television. My TV experience costs more like 11 cents per hour.

Thompson also points out how a la carte would affect advertising and notes that this analysis doesn’t reflect how people watch TV in the real world.

…a great deal of TV time is spent “surfing” for nothing in particular, or watching shows to which we ascribe no real monetary value but we watch anyway because we’ve already paid the monthly access bill.

Eduardo Porter, in the New York Times, also argues that Americans might be more likely to pay for content if they knew what they were paying for, even suggesting that a coin slot attached to the TV or PayPal account would enable purchase of individual shows, regardless of which network they are on.  But all Porter has to do is look at the cost of pay-per-view to realize this is a much more expensive way to watch your favorite shows.

We’ve covered the topic of a la carte several times before, but the point is that cable networks will lose the broad carriage they have now and be forced to spend considerable money to market and sell the channel to individual consumers. Revenue goes down, operating costs go up. Programming will be impacted.

There’s usually a conclusion to all these “analyses,” even if they don’t say it flat-out: “If you would only move to à la carte or some kind of metered plan – then consumers would pay less.”

Except, perhaps, they wouldn’t.